Medicare Part D Saves Money for Many Participants

A branded drug sold to an elderly consumer covered by a Medicare Part D plan cost at least 24 percent less than the same drug sold to an uninsured consumer.

Passed in December 2003 and operational in January of 2006, Medicare Part D subsidizes prescription drugs for the elderly in the United States by contracting with private plans to provide drug coverage. Part D enrollment is voluntary. The government pays each plan a lump sum for each enrollee that chooses it, and the private plans, not the government, negotiate drug prices.

In The Effect of Medicare Part D on Pharmaceutical Prices and Utilization (NBER Working Paper No. 13917), co-authors Mark Duggan and Fiona Scott Morton review Part D's performance in its first year and estimate that a branded drug sold to an elderly consumer covered by a Medicare Part D plan cost at least 24 percent less than the same drug sold to an uninsured consumer. Branded pharmaceutical prices on average rose from 2003 to 2006, but those brands with substantial sales moving from cash-paying patients to Medicare Part D patients increased much less than other brands. At least for the first year of the program, these results do not support the claim that leaving the federal government out of Part D price negotiations would cause branded drug prices to rise.

Relative price declines were concentrated in therapeutic categories in which plans could pick and choose the favored drugs from a variety of therapeutic substitutes. Interestingly, these price declines did not appear in the therapeutic categories in which there are very few substitutes for a treatment, suggesting that plans' ability to shift sales among substitute products creates price competition.

The authors conclude that, "a significant benefit of the program is the way it is organized, regardless of the subsidies." Approximately half of Medicare recipients' prescription drug expenses were paid for out of pocket, and the movement "of Medicare recipients from cash-paying uninsured status to insured under a plan" caused the observed decline in per unit prices. The results suggest that elderly consumers would pay less for their prescriptions in a Part D plan with a zero subsidy than they would by paying cash.

The benefit arises from the way in which private plans drive use towards less expensive therapeutic substitutes. The gains from doing this apparently outweigh the "classic insurance-induced increases in pharmaceutical prices" and lead to a reduction in overall program expenditures. These results did not suggest that Part D coverage affected either price or utilization for Medicare recipients who already had prescription drug coverage.

Pharmaceutical sales data for branded drugs, excluding those to hospitals and long-term care facilities, came from IMS Health. Data on individual drug use, Medicare market share, and insurance status came from the Medical Expenditure Panel Survey (MEPS). The researchers compared prices and quantities prescribed in 2006 with prices and quantities prescribed in the base year of 2003. The authors caution that their results do not include the effects of any drug rebates or the effects on price or utilization for any drugs or treatments introduced after 2003. They add that the effects of Part D on the health and out-of-pocket expenditures of Medicare recipients remain an important area for future research.

-- Linda Gorman